VOLUME 63 ◆ NUMBER 8 Employee Benefit Plan Review FEBRUARY 2009 How a 401(k) Plan Can Affect a Merger or Acquisition David P. Boucher A company preparing for a merger or acquisition Asset Purchase runs due diligence on the target company’s busi- An asset purchase is the acquisition by an organization of ness fundamentals, client overlap, client reten- certain business assets of another organization (for example, tion capability, growth models, compensation equipment, buildings, or accounts receivable) in exchange structures, plants, property, and equipment. What else is for consideration such as cash or stock of the purchasing there to cover? entity. A transaction structured as an asset purchase may or The 401(k) plan. Although not as complex as many may not require that the buyer assume responsibility for the of the upfront due-diligence steps of a normal corporate acquired organization’s retirement plan. action, handling a 401(k) plan properly takes some care If the acquisition was the result of an asset sale, a and proper planning. This article outlines some of the care merger of the buyer’s and seller’s plans may be feasible if: and planning necessary for a successful corporate action as it relates to a 401(k) plan. • There is a mutual agreement To prepare for the successful business transaction, the • The buy/sell agreement states that the buyer and seller 401(k) due diligence team must evaluate which type of will share in the decision making regarding the disposi- acquisition is about to take place: stock or asset purchase. tion of the seller’s plan. Once this acquisition structure has been identified, the due diligence team must understand its options as they relate to As a quick reference, the following are the four possible that particular type of transaction. solutions a buying organization has with respect to the seller’s 401(k) plan: Stock Purchase A stock purchase is the acquisition by an organization 1. Merge the two plans into one new plan; or individual of the stock of an organization in exchange 2. Maintain two plans separately and make continued for consideration such as cash or stock in the purchasing contributions to both plans on an ongoing basis; organization. The sellers in this case are the owners of the 3. Freeze one of the plans and add the participants of the organization being purchased. They are selling their own- frozen plan to the other plan on a future basis; or ership interests in the form of shares of stock and receiving 4. Terminate one of the plans and add the participants of consideration in return. that plan to the other plan on a future basis allowing A stock purchase typically requires that the buyer the terminated plan’s participants to roll over their assume responsibility for any associated qualified terminated plan benefits to the ongoing plan. plans, unless those plans are terminated prior to the close. Merging the Plans If the acquisition is the result of a stock sale, the buyer Merging plans involves the consolidation of two or will assume the seller’s retirement plan, unless the plan was more plans into a single plan. Merging may be the best terminated prior to close. If it is not terminated, the buyer choice to try to reduce administrative costs, or if the buyer may consider merging it with its own plan or maintaining wants to create consistency, ease of administration, or it as a separate plan. simplify communications efforts. Maintaining Separate also be attractive for a buyer who are taken into account. If a buyer Plans wants to cover the acquired employ- desires to terminate a plan under In this option, the retirement ees in the buyer’s current retirement a stock purchase, the plan must plans of all affected organizations plan. A frozen plan must continue to be terminated prior to the close. will be maintained separately. This be subject to governmental reporting Communication at the point of might be the best choice: and disclosure requirements. Frozen close is important to relieve par- plans must also be amended to ticipant anxiety. Finally, post-close • To provide different benefits to remain in compliance with changes communication with the current one group in order to attract or in laws and regulations. Finally, all provider and the previous pro- retain key employees or because participants’ vesting may need to be vider is important. Closing out a the terms of a collective bargaining brought up to 100 percent. retirement plan properly alleviates agreement; potential issues years later with • If the acquiring organization does Terminating the Plan the Internal Revenue Service and not want to amend its current Under this option, the plan the Department of Labor. A final program to include the protected ceases to allow benefit accruals and 5500 is required when merging one benefits from the other plan; contributions, and all of the plan’s retirement plan into another. • If the acquiring organization does assets are distributed. Generally, not want to amend the plan to all active participants and certain Conclusion offer more generous vesting; or terminated participants become In closing, handling the retirement • If the acquired organization’s plan 100 percent vested. Typically, this benefits package during a corporate has potential compliance issues option is chosen due to protected action is not the most complicated that could “taint” the plan of the benefits concerns or compliance due diligence matter, however, docu- acquiring organization. issues. Participants are allowed to menting the process and communi- roll over their account balances from cating it effectively can be critical Freezing an the terminated plan into their new to a successful integration of an Acquired Plan employer’s plan. acquired organization. ❂ Freezing a plan involves taking the Regardless of the buyer’s choice steps to formally discontinue con- in handling the seller’s 401(k) plan, tributions or cease benefit accruals communication efforts during the David P. Boucher, CFP®, AIF®, is without distributing all of the plan’s pre-close, the at-close, and the vice president, retirement plans, assets. This option may be attractive post-close periods are critical. Pre- with Longfellow Benefits, a Boston- for buyers that are concerned close communication is important based employee benefits consultant with the compliance record of the so the best interests of all affected and brokerage. He can be reached at acquired organization’s plan. It may entities and timeliness of decisions email@example.com. Reprinted from Employee Benefit Plan Review, Volume 63, Number 8, February 2009, pages 12–13, with permission from Aspen Publishers, a WoltersKluwer Company, New York, NY 1-800-638-8437, www.aspenpublishers.com.
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